Introduction
HMRC inspections can become quite costly, time consuming, and very stressful. This article discusses the issues that raise alarm bells with HMRC, and advises how to minimise the risk of an investigation.
See our other article for an explanation of HMRC tax inspections.
Times have changed
HMRC is very aware of “one man” consultancy companies, particularly those used for computer contractors.
HMRC is very aware of one man consultancy companies
David Colom
HMRC used to take little interest in one man service companies. There activities were confining to “routine” PAYE inspections where they
checked PAYE calculations and asked a few questions about private use of telephones.
Things have significantly changed – and not for the better.
However, actions by you can mitigate the chances of an investigation and ensure you are prepared:
IR35
Factors leading to an IR35/payroll inspection are:
-
Ticking the box on your Employer’s Annual Return (form P35) that some or all of your income may fall within IR35
-
Paying a small salary/large dividend.
-
Having a company name which is obviously that of a computer contracting company. Existence as an IT consultancy inevitably leads to questions about IR35 status.
If you claim you are outside IR35 you will be asked to justify your reasons
David Colom
If you claim you are outside IR35 you will be asked to justify your reasons.
You should ensure that you have a very good justification and strong argument
for your decision.
Section 660
Factors leading to a Section 660 enquiry are:
-
Having a shareholding structure including a spouse or close relative who
doesn’t actually carry out any work for the company (apart from minimal
secretarial duties).
HMRC see Section 660 as a very lucrative source of additional tax
David Colom
HMRC see Section 660 as a very lucrative source of additional tax.
If you are operating under such a structure you should consult your accountant
to discuss the position and options for avoiding a serious problem.
Changes in share structure
Factors that could trigger an investigation are:
-
Major changes in a company’s shareholding structures, including dividend
waivers.
-
Any shareholders that are non productive/working.
-
Any shareholders that are non resident in the UK.
An Inspector of Taxes may well ask for a commercial justification of the
arrangements above.
Non allowable expenses
The Inspector of Taxes is aware that many contractors may not be aware that
certain expenses are disallowable. Examples include business entertaining,
business clothing and private use of company assets.
See Valid Expenses as a Contractor - What You Can Claim.
and Contractor Doctor - Can Expenses be Claimed For Entertainment?
Travel expenses
High claims for travel are likely to result in a request for
justification/documentary evidence.
Claims without receipts for travel/subsistence should be avoided wherever
possible, since this is a particularly sensitive issue for HMRC at the present time.
Use of home as office
Any claims for expenses for “use of home as office” should be fully
justifiable.
HMRC are aware that contractors have previously made claims
without any real justification.
For more on this topic see Claiming Contractor Expenses for Use of Home As Office.
Company car expenses
Company cars in a one man contractor company are becoming a rarity as discussed
in our article on contractors and company cars.
If you do have one, you should fully account for the benefit in kind tax
arising and also the Class 1A National Insurance.
HMRC cross check the accounts of companies with cars to Class
1A/P11D forms and any under declaration or non compliance is likely to be
picked up and investigated.
P11D compliance
David Colom
Principal
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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If expenses are claimed in your company and reimbursed to you, you should
ensure that a form P11D is completed, making full disclosure of any benefits in
kind and expenses reimbursed.
HMRC do cross check expenses claimed in one man companies to the
director’s form P11D, particularly if expense claims are high.
Published: Monday, July 17, 2006
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